market drops but not all the news is bad

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larryswedroe
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market drops but not all the news is bad

Post by larryswedroe »

http://www.cbsnews.com/8301-505123_162- ... s-is-bad/?

Since the media tends to focus on the bad news I have found it helpful from time to time to remind investors that not all the news is bad
Hope you find it helpful

Best wishes
Larry
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Higman
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Re: market drops but not all the news is bad

Post by Higman »

Hi Larry,

In your article you said "Corporate balance sheets are very strong, with companies sitting on $1.5 trillion, the largest cash hoard in history".

Just where is this money sitting now? Bank accounts, short term treasuries or what?

And when they decide to re-deploy the $1.5 trillion I wouldn't want to be holding the same assets that they will be liquidating.

Thanks.
Topic Author
larryswedroe
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Re: market drops but not all the news is bad

Post by larryswedroe »

Higman
Basically cash hordes tends to sit in very high quality short term investments. So why would you not want to hold those if they are selling?
Best wishes
Larry
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Higman
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Re: market drops but not all the news is bad

Post by Higman »

Larry,

Supply and demand will reduce the NAV of these assets if $1.5 trillion worth get put on the market.
Levett
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Re: market drops but not all the news is bad

Post by Levett »

Is this news or noise?

Why should I care?

Markets go up; markets go down. :oops:

Lev
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larryswedroe
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Re: market drops but not all the news is bad

Post by larryswedroe »

Higman
Sorry but that is simply not true, necessarily.
If they are sitting for example on tbills the impact is going to be zero. And remember it is all not going to disappear at once.
Now if they are aggressively spending because economy growing of course rates will rise
trico
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Re: market drops but not all the news is bad

Post by trico »

Levett, Your right about markets go up and down. That is why most people are in bad shape for retirement. House prices go up and down too. So why buy into these type of investments that have market risks? Why not buy into an investment that can go up but cannot go down? That why I buy EIA.
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larryswedroe
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Re: market drops but not all the news is bad

Post by larryswedroe »

Lev
I wrote the piece for those that don't know enough to ignore the news/noise and don't have plans they can stick to. Hopefully by providing them with a sampling of some good news it might allow them to stay more disciplined and to sleep a lot better.

Trico
Hard to imagine worse investments than EIA, they are the poster boy for products that are sold but should NEVER be bought. Which is why I don't know a single fiduciary advisor who has ever recommended one. Only commissioned based salespeople do that, at least in my experience.

Best wishes
Larry
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larryswedroe
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Re: market drops but not all the news is bad

Post by larryswedroe »

Higman
BTW-here is simple example to show how wrong you can be

Say Apple goes on buying binge and buys companies using say $500b in cash. Now the cash is gone from their balance sheet. Now the sellers of the stock take the proceeds and put them in their banks or buy Tbills or other similar instruments to what Apple was holding. Net impact ZERO on rates.

Best wishes
Larry
Levett
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Re: market drops but not all the news is bad

Post by Levett »

If we're gonna invest, we gotta get rid of them wabbit ears, wight? (in my best Elmer Fudd). :wink:

Lev
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Dale_G
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Re: market drops but not all the news is bad

Post by Dale_G »

larryswedroe wrote:Higman
BTW-here is simple example to show how wrong you can be

Say Apple goes on buying binge and buys companies using say $500b in cash. Now the cash is gone from their balance sheet. Now the sellers of the stock take the proceeds and put them in their banks or buy Tbills or other similar instruments to what Apple was holding. Net impact ZERO on rates.

Best wishes
Larry
Or the sellers could spend the money on a manufacturing facility in a lesser developed country - poof! - an non-ZERO impact on rates :D

Dale
Volatility is my friend
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larryswedroe
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Re: market drops but not all the news is bad

Post by larryswedroe »

Dale
Exactly, there is no reason to believe that just because they spend the money that rates must rise. Depends on what they are spending it on and why.

Larry
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Daffy
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Re: market drops but not all the news is bad

Post by Daffy »

Good news means nothing. Everyone should know that by now. It takes the market 6 months or longer to digest good news, but 6 milliseconds to digest bad news. That's why there are always steep declines, and very slow, steady gains (how often does the market ever go up 5% in 3 days?). Day traders and high-frequency-trading algorithms dictate the market, not the fact "corporate balance sheets hold a lot of cash". The trick for the buy-and-hold investor is to live long enough for it to balance out so the real-rate of return based on one's point-of-entry is positive compared to other low risk-based assets.

I understand the point you're trying to make Larry, but I'm a perma-bear by nature so no amount of good news is enough to offset my long-standing negativity toward the necessary evil of risk-based investing and the associated stress it creates.
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larryswedroe
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Re: market drops but not all the news is bad

Post by larryswedroe »

Daffy
Sorry to say but good news is digested just as quickly as bad news. It's just that bad news is felt more strongly than good news so often the reactions greater, but the speed of the reaction is the same. And the day traders etc are not dictating the market. That is sheer nonsense. They don't determine impact the real value of a company. All they might do is impact valuation on a particular day, but not long term and that is all the investor should care about.
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Daffy
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Re: market drops but not all the news is bad

Post by Daffy »

larryswedroe wrote:Daffy
...[day traders]...They don't determine impact the real value of a company. All they might do is impact valuation on a particular day, but not long term and that is all the investor should care about.
Exactly my point. Day traders and HFT algorithms as you say can and do impact valuations on a particular day, i.e. just about every day, but long term, as you also say, fundamentals eventually get digested and the market drifts slowly up. Hence we typically see long-term real returns as buy-and-hold investors. I'm not denying that. I'm just of the opinion that in the day-to-day, hear-and-now moment headline "good news" is mostly irrelevant, while headline "bad news" can and often does trigger massive sell-offs due to HFT algorithms. History has shown that behavior over-and-over.
Topic Author
larryswedroe
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Re: market drops but not all the news is bad

Post by larryswedroe »

Daffy, so we agree that investors should not care about day to day movements and that HFT traders actually help provide liquidity lowering trading costs as Vanguard has stated.
Second, HFT traders could just as easily drive prices up as down.
Larry
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Jerilynn
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Re: market drops but not all the news is bad

Post by Jerilynn »

larryswedroe wrote: Trico
Hard to imagine worse investments than EIA, they are the poster boy for products that are sold but should NEVER be bought. Which is why I don't know a single fiduciary advisor who has ever recommended one. Only commissioned based salespeople do that, at least in my experience.

Best wishes
Larry
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